As a self-employed entrepreneur, you’ve probably heard of FICA taxes, either from your past employers or on a blog discussing taxes for freelancers. It can be confusing to see FICA taxes and self-employment together in one sentence, but you still need to pay them as a freelancer.
Employee Taxes vs. Self-Employment Taxes
If you’re employed, and you also earn wages from employment, your employer will often pay 7% to 10% of your total tax burden. If you’re also self-employed, either as an independent contractor, sole proprietor, or single-member LLC, you’ll pay 15.3% on your extra income.
If you own a corporation, not-for-profit, S Corp, or C Corp, you’re likely not self-employed.
Understanding FICA, aka Self-Employment Tax
It can be strange to see self-employment tax explained as “FICA” taxes, but they’re actually the same thing. FICA and self-employment tax (SECA) represent the 12.4% freelancers will pay for Social Security and the 2.9% paid towards Medicare, which adds a 15.3% tax burden.
If you make $200,000 per year when filing individually or $250,000 when filing jointly, you’ll pay an extra 0.9% Medicare surcharge on top of the 15.3%, totaling to 16.2%. If you make that much in self-employment income, you should consider scaling your business to save money.
How to Pay FICA Taxes to the IRS
Although employees and self-employed individuals both have to pay FICA taxes, there are fundamental differences in how each party files their taxes and reports their income to the IRS.
FICA Taxes for Employees
Employers must withhold FICA taxes from their employees’ income. Most employers will take more than necessary to ensure their employees don’t have to settle up the difference during tax time. However, employees typically don’t pay extra FICA taxes at the time of filing.
Employees will fill out a W-2 before being hired to determine how much the employer withholds from their paychecks for tax purposes. Employees then fill out Form 1040 as an “employee.”
FICA Taxes for The Self-Employed
If you’re self-employed, you need to keep 25-30% of your income to pay your FICA taxes directly from your pocket. You won’t have an employer who helps with your tax burden, so if you spend too much money, you’ll have to make it up before the default deadline (April 18th).
If you have to file quarterly (the IRS will notify you, if that’s the case), you have to pay close attention to the amount you spend. Otherwise, you could owe thousands that you can’t pay.
Independent contractors will receive 1099-NECs from each payer or employer if they earned self-employment income. You don’t have to send your 1099s forms to the IRS when filing, as they’re used as proof of income, and your employer should have already done that for you.
Self-employed individuals will fill out Form 1040 as “self-employed.” You’ll know how much you owe the IRS after you receive your tax bill. You should pay this amount by April 18th.
How to Calculate FICA Taxes for Freelancers
The easiest, most effective way to calculate your taxes as a freelancer is by using online calculators or financial software. If you prefer the pen and paper method, add up the net income from your business for the year you’re filing, then deduct self-employment taxes owed.
The amount you deduct is largely determined by your tax bracket. You could pay as much as 50% if you’re in the 37% tax bracket, but at that point, you might as well become a corporation.
You can deduct as much as 50% of your tax burden through deductions. There are over 15 self-employed deductions you can take advantage of, like home office and vehicle expenses.